Vang SJC

WTI oil was on the rally from November 17th to November 21th, thanks to the market optimism toward OPEC output cut agreement. However, the closing price dropped from 48.02 in last Tuesday to 47.01  yesterday. Today (Tuesday, November 29th) WTI oil slightly recovers and is currently at 46.95 at 7:45am (GMT). The price has adjusted after a significant drop previously.

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Figure 1: WTI oil D1 chart

The main driver of the price change in the recent weeks is the OPEC meeting held Wednesday November 30th. Despite the force of other factors such as the U.S economic data and inventories data, WTI price has been following comments from ministers about the outlook of the output cut agreement. OPEC is the key focus of the market this week. According to International Energy Agency, world oil’s demand in October is 97.08 million bpd, while October global supply is at 97.2 million bpd, exceeding demand 120,000 bpd.

The movement – both short term and medium term- of the price depends mainly on the outcome of OPEC meeting tomorrow in Vienna. Market expect an output cut.

Oil supply – OPEC related news

The previous week

Last week, Iraq’s oil minister said he was “optimistic about the deal, which sent the price up to about 2%.. OPEC also allowed Iran to be exempted from the agreement as long as it accept to cap the output at current level. On Wednesday, Iraq Prime Minister Haider al-Abadi told reporters in Baghdad that Iraq is willing to reduce the output in order to boost the oil price. This is an indicator that gives trader optimism about OPEC next meeting.

However, one day after, Russia, a non-OPEC member told that it would only freeze the current output, and refused to reduce it, adding that Russia’s position “has remained unchanged and consistent”. The role of Russia is extremely crucial in making the OPEC agreement happen. Even if Algier agree to cut out put, global supply would barely be drained without cooperation of non-OPEC member. This comment was the key to the price slump last week starting from Wednesday.

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Figure 2: Russia output compared to OPEC output. From Bloomberg

This week – Last week of November

As there is no high-impact economic data since Monday, the eye of the market is primarily on the OPEC meeting Wednesday.

Since the beginning of this week the oil market has seen a couple of shaky headlines. Starting with Sunday when Saudi oil minister floated the possibility of having no agreement in the meeting on Wednesday. On Monday, Iran and Iraq failed to come to a division of output after 10 hour of meeting, according to the information of OPEC delegates. While all members express their awareness about the benefit from price increase, they are making negotiation tactics in order to protect every piece of market share.

OPEC has cancelled meetings with non-OPEC members, including Russia. In addition to the crucial meeting with non-OPEC members last Monday which was cancelled, the organization also pulled out the breakfast meeting with other nations this week. According to Al-Falih, Saudi Arab ministers, OPEC should resolve its internal dispute before discussing with outsiders. He also commented that “the oil market would balance itself in 2017 even if producers did not intervene, and that keeping output at current levels could therefore be justified.”, leaving the possibility of the deal loomy.

Analysts expect that OPEC will come to a deal with Russia and finally create global output cut agreement tomorrow, though the foundation of the deal at the moment is shaking. The market is extremely sensitive to mixed information related to OPEC. After the deal, short to medium term effect could happen, but long term change in price is questionable. Nevertheless, it is likely that if the agreement weren’t made tomorrow, the oil market would be in surplus and price could go down even further.

The outcome of OPEC meeting would directly affect the loonie and Canada economy – the largest oil exporter. Last week, Canada reported its core retail sale, a strong economic indicator, making zero change in October, after growing 0.2% last month. Its foreign securities purchased also dropped from 12.75 billion CAD to 11.77 billion CAD this October. The above factors portrait a slow economy and low level of foreign transaction. While having its monthly GDP and employment change report this week, keeping an eye on OPEC meeting will be the nation’s priority this week.

Asian demand outlook

It is noteworthy to assess the comment of Mr. Al-Falih that “the oil market would balance itself in 2017 even if producers did not intervene” by looking at the oil demand of the new Asian Market. Oil has a promising future in this market as the demand is high and the structure and the economic situation allow growth.

China’s Stable Economy

As one of the world’s largest energy product importer, China economy has impact on oil price. There are some early indicator showing that China economy in November is stable.

The China Satellite Manufacturing Index rose to 51.4 this month, the highest since mid-2011. The index uses commercial satellite imagery to monitor activity of industrial facilities. The index also follows similar rule to official manufacturing purchasing managers index. A readings above 50 indicates expansion.

The S&P Global Platts China Steel Sentiment Index jumped to 59.37 from 48.92 in October as market sentiment is more optimistic on higher prices number of orders. The Market News International China Business Sentiment Indicator rose to 53.1 this month from 52.2 in October. The index is made from a survey of business leaders listed on the Shanghai and Shenzhen stock exchanges.

This factor positively affects WTI oil price.

Asian Market contango structure

U.S and European oil producer are targeting Asian Market (Japan, South Korea, Thailand, Laos, etc.) because of the contango structure of the market has made future price of the commodity higher than its expected price in the future. Therefore, seller enjoy the gain by having long-journey shipment. Buyer from Asia also benefit from a variety of oil (Brent, WTI, etc.) As a result, Asian demand increase and positively affect the price.

Indian Market local producer

India is a fastest growing oil consuming market of the world. The country recently attract investment to build more local oil and gas field, in order to reduce foreign purchase of oil. They are looking for 34 of 46 discovered fields with can provides more than India’s current total annual output, according to a government statement. Oil Minister Dharmendra Pradhan said the bids for the fields will be finish by December-end

More local producers means that foreign oil demand will decrease in the future. This may push the oil price down.

U.S factors

Crude oil inventory

After three straight weeks of build up, U.S crude oil inventory fell 1.3 million barrel last week, according to EIA data published on Wednesday. Imports dropped and refinery raised output causing the oil stock to fell. Generally, this information should have pushed the price up. Perhaps the expectation for the meeting of OPEC has stronger impact than U.S inventory data this week. U.S crude oil inventory will be reported by API today and by EIA officials on Wednesday

Donald Trump speech and drilling activity.

Elected President Donald Trump announced that restrictions on shale oil  production will be lifted in the first 100 days of his protectionist policies . According to Baker Hughes, U.S crude oil rig count rose by 3 to 474 last week, the 20th increase in the last 22 weeks. This data support production fall and hence put pressure on price. If the new President plan start being implemented next year, drilling activity in U.S could rise and drive the price down in the future.

U.S Dollar Index

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Figure 3: Dollar Index D1 Chart. From Investing.com

The value of USD directly affect WTI price – a commodity denominated in the U.S currency. The index slightly fell since Monday and is currently at 101.39, due to the profit taking after last week’s strong move. Besides, the Dallas Fed manufacturing index, which turned positive for the first time in nearly two years and rose to its highest level since July 2014, indicates that the U.S economy is strong and ready for the rate hike, hence the currency fundamental is intact. The uptrend could continue soon. As a result, WTI price decreased.

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